What Is Self Assessment And Do I Need To Do It?
Self-Assessment is a system HM Revenue and Customs (HMRC) uses to collect Income Tax. Tax is usually deducted automatically from wages, pensions and savings. Individuals who are self-employed must report it in an income tax return.
Other income to declare in a tax return includes (but is not limited to) income from:
- Being a landlord (even if the income only covers the mortgage).
- Work, investments or other sources not based in the UK
- Capital gains or inheritance
- A partnership
- An additional source to your main employment e.g. Part time freelancing
It is useful for your accountant to be aware of any changes to your personal circumstances before they occur so that the financial and tax implications can be discussed.
How To Work Out What Is Owed?
Your tax return covers the financial year beginning 6th April to 5th April & you should complete your tax return online by 31st January in the following year. When preparing your self-assessment tax return there are many aspects of your finances that need to be taken into consideration as they will affect how much you owe the tax man.
The following information will be required by your accountant to calculate your tax liability (not all will be relevant to your individual circumstances):
Reducing Your Tax Bill
There is a number of ways you can reduce your tax bill with sound financial planning. Depending on your circumstances it may be beneficial to take advantage of the schemes / tax allowances stated below. The following list is by no means exhaustive and we advise you seek the advice of your accountant or financial adviser.
- Submit your tax return by the deadline, miss the deadline and there’s an automatic £100 fine – even if you don’t owe any tax.
- Check your tax code each year, or after changing jobs, to make sure it’s correct for your situation. If you’re on the wrong code, you may be entitled to pay less tax in coming months or receive a refund for previous years.
- You won’t need to keep making National Insurance contributions if you carry on working beyond state retirement age. Ensure your employer is aware of this and adjusts your pay.
- Marriage Allowance lets you transfer £1,250 of your Personal allowance to your husband, wife or civil partner – if they earn more than you. This reduces their tax by up to £250 in the tax year (6 April to 5 April the next year). To benefit as a couple, you (as the lower earner) must normally have an income below your Personal Allowance – this is usually £12,500.
- You may have tax free allowance of your first £1,000 of income from property you rent (unless you’re using the Rent a Room Scheme)
- The rent-a-room scheme allows you receive up to £7,500 in rent each year from a lodger, tax-free. This only applies if you rent out furnished accommodation in your own home, and you live in the property as well.
- If you rent out property, you can deduct a range of costs from your taxable income. These include the wages of gardeners and cleaners, letting agency fees, ground rents and service charges, landlord insurance and accountant’s fees.
- Landlords are normally liable for capital gains tax when they make a profit from selling a rental property. However, if the property has been your main home at some time in the past, you can claim tax relief for some of the period of ownership.
Sole-trader / Partnerships:
- You may be eligible for a tax free allowance of your first £1,000 of income from self-employment – this is called your ‘trading allowance’
- If you are a sole trader or in a partnership you may be able to claim tax relief on some forms of expenditure for and on behalf of the business. Costs you can claim as allowable expenses include:
- Capital gains is the profit you make from selling certain assets, including second homes, art, antiques and shares. Capital gains of up to £12,000 are tax-free in 2019-20. Married couples and civil partners who own assets jointly can claim a double allowance of £24,000. Remember, if you don’t use the allowance within the tax year, it’s lost forever. You can’t add your tax-free allowances together for different years.
- You won’t be charged capital gains tax if you transfer assets to your spouse or civil partner – and a lower-earning spouse may pay more favourable income tax rates. So, it may be worth transferring savings and investments to your husband, wife or civil partner if they pay a lower rate of tax than you do.
- Each year, you can earn a certain amount of income from dividends before paying tax. Currently you can earn up to £2,000 each year in dividend income without paying tax.
Depending on your personal circumstances there may be a number of income streams which will need to be assessed in order for you to pay the correct tax. Keeping all your paperwork organised can ensure no income is omitted from the tax return. There are also ways of reducing you tax bill, keeping your accountant abreast of your changing circumstances will allow them to advise you of potential ways to keep your tax bill down.
With over 20 years’ experience Price Davis can offer expert advice to allow you to better understand and reduce your tax liabilities.
Contact us today: 01452 812 491, firstname.lastname@example.org